The stream of negative economic news continues, impacting job prospects, wages, investments, and interest rates, though there is a glimmer of hope amidst the gloomy economic outlook.
Recent national accounts data and GDP growth rates paint a bleak picture for early 2024. In the March quarter, real GDP grew by a mere 0.1%, following modest growth rates of 0.3%, 0.2%, and 0.4% in the previous three quarters. The annual GDP increase stands at just 1.1%, marking the weakest growth in three decades outside of the pandemic period.
Typically, quarterly GDP growth averages around 0.7 to 0.8%, with annual growth around 3%. However, Australia in 2024 is falling significantly short of these benchmarks.
The fundamental components of the GDP data do not inspire confidence in an imminent economic recovery. Household savings are nearly depleted, indicating severe financial stress among consumers who are struggling to cover essential expenses such as rent, mortgages, and non-discretionary spending.
Additional concerns include an unsustainable buildup in inventories that barely kept GDP growth positive, a decline in dwelling investment, and net exports dragging down the economy.
Another rate hike, once considered a possibility, would now be disastrous. Instead, the scenario for rate cuts is gaining traction, especially as the unemployment rate is expected to rise in the coming months. The Reserve Bank of Australia (RBA) forecasts the unemployment rate to peak at 4.3%, just 0.2 percentage points above the current rate, which has yet to fully reflect the weak GDP data.
It is unrealistic to expect that economic growth of 1 to 1.5% per year will keep the unemployment rate below 4.3%. Given the current downturn and sluggish economic activity, the unemployment rate is likely to exceed 4.5% and approach 5% unless the RBA eases monetary policy.
Every Cloud Has a Silver Lining
The upside of weak economic activity and rising unemployment is the prospect of further declines in inflation and subsequently, lower interest rates.
However, this shift won’t happen immediately. The RBA remains cautious about the time it takes to bring inflation back to its 2 to 3% target, despite indicators suggesting this will occur by the end of 2024.
To prompt a move towards interest rate cuts, the RBA needs to see a clearer disinflation outlook and a more realistic unemployment forecast. The upcoming labour force and inflation data will be crucial for future interest rate decisions.
Once higher unemployment and lower inflation are evident, the RBA will likely cut interest rates. Key dates to watch are July 31 for the June quarter inflation data and August 28 for the July data, which will reflect the deflationary effects of electricity and rental subsidies. By August, labour force data should show unemployment approaching 4.5%, leading to a serious discussion about rate cuts at the RBA meeting on September 23 2024.
Additionally, by then, several global economies, including the Eurozone, Canada, the UK, Sweden, Switzerland, Brazil, and others, are expected to commence interest rate cutting cycles. This would be an opportune moment for the RBA to join in.
